Bankwell Financial Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Bankwell Financial Group First Quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. I will now hand today's call over to Courtney Sacchetti, Chief Financial Officer. You may begin.

Courtney Sacchetti (CFO)

Thank you. Good morning, everyone. Welcome to Bankwell Financial Group's First Quarter 2025 earnings conference call. To access the call over the internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our first quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q, and 10-K, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you. I will now turn the call over to Chris Gruseke, Bankwell Financial Group's Chief Executive Officer.

Chris Gruseke (CEO)

Thanks, Courtney. Welcome, and thanks to everyone for joining Bankwell's First Quarter earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer, and Matthew McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance and this opportunity to discuss our results with you. On today's call, we'll provide updates about our financial and operating performance for the first quarter. Our financial results for the quarter include GAAP fully diluted earnings per share of $0.87, which were up 135% relative to the fourth quarter and 81% versus the first quarter of 2024. Earnings benefited from a lower, more normalized provision expense, an expanding net interest margin, an increased contribution from SBA gain on sale, and some modest share buyback activity.

We were pleased with the progress made this quarter on several strategic initiatives, which we've been discussing with shareholders since the third quarter of 2024. In late January, we successfully disposed of two previously identified non-performing credits: an $8.3 million OREO asset, which was sold at book value, and a $27.1 million multifamily loan, which was sold at par. Collectively, these dispositions drove non-performing assets as a percentage of total assets 105 basis points lower sequentially, finishing the quarter at 83 basis points. Further details regarding NPAs can be found on slide 11 of our investor presentation. Regarding loan growth, elevated payoff activity of $200 million offset strong origination activity of $130 million funded during the first quarter, resulting in a modest reduction in net balances versus year-end 2024. SBA originations grew during the first quarter to $10 million, and gain on sale margins were just over 10%.

We remain optimistic about SBA gain on sale activity accelerating throughout 2025. Commercial loan pipelines, including SBA activity, continue to be active, and despite a slower first quarter, we still expect low single-digit loan growth for the full year. On the liability side of the balance sheet, we had another positive quarter of paying down broker deposits, which declined $81 million relative to the fourth quarter, while core deposits grew $43 million, including $28 million of growth in non-interest-bearing deposits. Over the last 12 months, we've now reduced broker deposits by $207 million while growing core deposits by $244 million. Our balance sheet remains liability-sensitive, with additional margin expansion expected in 2025 as maturing term deposits repriced to lower current rates. Now, to discuss our financial results in greater detail, I'll turn it back to Courtney.

Courtney Sacchetti (CFO)

Thank you, Chris. Our first quarter pre-provision net revenue of $9.4 million or $1.22 per share increased 11% relative to the fourth quarter, with the PPNR return on average assets increasing to 118 basis points versus 105 basis points in the fourth quarter. Reported net interest margin for the quarter of 281 basis points represents a 21 basis point increase relative to the linked quarter, which includes a one-time net 9 basis point benefit resulting from the collection of accrued interest on a disposition of one of our large non-performing loans, which was partially offset by accelerated fees on called brokered CDs. Core net interest margin expansion of 12 basis points primarily benefited from a continued decrease in our total cost of funds, which fell another 12 basis points versus the linked quarter to 3.60%. That linked quarter reduction follows a 9 basis point reduction in the fourth quarter.

As we note in the earnings release, our March 2025 cost of funds was $352, reflecting incremental benefit from recent cost reductions on market-rate deposits. We expect impact from these updates to carry into the second quarter. On slide 8, we continue to highlight our term deposit maturity schedule, which shows $1.2 billion of time deposits maturing in the next 12 months, $719 million of retail CDs repricing at an average of 22 basis points lower, and $495 million of brokered CDs repricing at an average of 53 basis points lower, both based on current rates. Also, we anticipate more than $500,000,000 in loans to reprice or mature over the same time period, which could further benefit margin by an additional 15-20 basis points on an annualized basis.

Considering the various inputs to margin, we expect continued expansion over the balance of 2025 and can reaffirm our net interest income guidance for full year 2025 of $93-$95 million. This guidance assumes no further actions by the Fed for the balance of this year. Non-interest income of $1.5 million increased 56% versus the linked quarter, largely driven by $424,000 of SBA gain on sale income. As Chris stated earlier, we expect SBA volume to continue to build in 2025, with a full year estimate of approximately $50 million of originations. The linked quarter increase in total non-interest expense to $14.1 million was primarily driven by higher salaries and benefits, partially attributable to timing events related to incentive in both periods, as well as increased headcount. Additionally, we saw an increase in initiative-related costs and professional service fees.

These increases are partly offset by a reduction to OREO expense incurred at the end of 2024. Our efficiency ratio for the quarter was 59.9%, an increase over the prior quarter. As our net interest margin continues to expand and non-interest income grows, we anticipate this ratio to improve. We reiterate our full year 2025 guidance for both non-interest income and non-interest expense of $7-8 million and $56-57 million, respectively. The first quarter's provision expense was $463,000 compared to $4.5 million in the prior quarter. First quarter credit trends were benign. Finally, a few thoughts on our financial condition. Our balance sheet remains well capitalized and liquid, with total assets of $3.2 billion, down slightly versus the linked quarter. We repurchased 29,924 shares at a weighted average price of $30.46 per share during the quarter ended March 31st and have 220,000 shares remaining on our authorization.

I'd like to now turn it back over to Chris for his closing remarks.

Thanks, Courtney. Before we conclude today's call, I'd like to comment on our continued ability to attract talented professionals to our organization. In April, we added two deposit teams in the New York metro area. These teams, with seven FTEs, have already begun the process of onboarding new customers. With continued disruption in the market for experienced talent, we'll continue to selectively add professionals who can help us achieve our strategic goals. We believe that our strong balance sheet, an experienced and nimble management team, and our customer-first business model make Bankwell an attractive platform for additional deposit teams. During the first quarter, we also hired a new Chief Technology Officer, Brian Merritt. Brian's considerable experience in banking technology, product development, and system architecture will enable us to lean into the rapidly evolving technology landscape. As we conclude, I want to thank the entire Bankwell team.

Their excellent effort and dedication have been instrumental to the evolution of this company. This concludes our prepared remarks, Operator. Will you please begin the question and answer session?

Operator (participant)

At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Chris O'Connell with KBW.

Chris O'Connell (Director of Equity Research)

Hey, good morning.

Chris Gruseke (CEO)

Good morning, Chris.

Chris O'Connell (Director of Equity Research)

I was just hoping to start off on the new teams and maybe whether they'll be more deposit or loan-focused or some mix of both, and then just maybe growth contribution, thoughts around growth contribution over time, or how big their prior books were.

Chris Gruseke (CEO)

Sure. Hey, Chris, it's Matt. I think that we're in the first couple of weeks of them joining the bank. The focus is definitely on deposits. Certainly, there'll be some loans mixed in, more deposits than loans. The books of business were quite large for both teams, both books of business over $100 million, lots of non-interest-bearing. We're hopeful that those will translate into a lot of migration to Bankwell, but as I said, we're in the early days of them onboarding with the bank, so more to come.

Chris O'Connell (Director of Equity Research)

Got it. Thanks, Matt. I apologize if I missed any items in the prepared remarks. Signed on a little late, but I was just hoping to get an update on the loan pipeline, what you guys are seeing from here. I think last quarter, the 2025 growth was 3-5%. Does the slower start to the year eat into that at all? Yeah, just any update on the growth outlook.

Chris Gruseke (CEO)

Somewhere in the remarks, Chris, I definitely had mentioned we still think we'll get low single digits, and it's a matter of timing. Matt, you want to add to maybe the pipeline? Okay, sorry. Yeah, I'll just add, Chris, that there were some lumpy payoffs in the first quarter that weren't originally budgeted, so there was no way to scramble and increase the pipeline to make up for those. We don't anticipate that that's going to be the case going forward, and the pipeline's robust. We had plenty of closings and fundings in the first quarter. Just the amount of unanticipated payoffs were so much higher than our fundings.

Chris O'Connell (Director of Equity Research)

Great. Where's the pipeline yield at?

Chris Gruseke (CEO)

It's holding strong. It's in that high sixes, low sevens, depending on the asset.

Courtney Sacchetti (CFO)

Matt, I'll just add to that our 1Q25 vintage is the yield average was 8.17%.

Chris O'Connell (Director of Equity Research)

Great. Yeah. Yeah, very great. Just because I know that there is a non-accrual interest recovery within the loans this quarter, do you have an exit loan portfolio yield or March? I do not know when the recovery—I guess when the recoveries are realized, but either a March yield or an exit yield or core loan yield for the quarter?

Courtney Sacchetti (CFO)

Chris, that would be about 640. I know it's 654 in our release, so excluding that, it would be 640, which is about a 10 debt expansion over the fourth quarter.

Chris O'Connell (Director of Equity Research)

Great. Thanks. Just continuing on the margin, I guess I was a little surprised while the margin expansion was great that given the amount of CDs that were maturing in the first quarter, that the interest-bearing cost did not come down a bit more. Just any thoughts around that, or I do not know if the CDs were maturing late in the quarter, if it was timing. Yeah, I guess anything on just the progress on the interest-bearing costs.

Courtney Sacchetti (CFO)

I'd say a little bit of timing. I will note that we did have some—we called the last of our callable brokered CDs in the first quarter and had to accelerate fees, pull them forward when we called those. That was a little bit of a one-time drag. It was a 2 basis point impact on NIM, about a 2 basis point impact on our cost of deposits. We were able to reprice our time—gosh, everything that was maturing in the first quarter. Our CD balances remained relatively flat quarter over quarter and 90-95 basis points lower than what it was coming off at. We felt pretty good about that. I think maybe just a little bit of timing and a little bit of one-time expense.

Chris O'Connell (Director of Equity Research)

Okay. Got it.

Chris Gruseke (CEO)

Chris, I'd add to that that in terms of what the numbers will be, when we talked about net interest income, we're factoring zero Fed cuts into that guidance.

Chris O'Connell (Director of Equity Research)

Okay. Great. Super helpful. Did you guys give us a spot margin for March or no? Or do you have it?

Courtney Sacchetti (CFO)

I did not give a spot margin for March. We did give the spot deposit cost of 352.

Chris O'Connell (Director of Equity Research)

Okay. Got it. Just with the NII guide unchanged, I do not think it was quite official guidance, but the full year NIM kind of hanging around in that 2.90%-3% range still feels good, absent any rate cuts?

Courtney Sacchetti (CFO)

Yes.

Chris O'Connell (Director of Equity Research)

Great. On the fee income side, a great start on the SBA gain on sale and originations there. How's the pipeline? Have you guys started better than you expected? How do you see the cadence moving on throughout the year?

Chris Gruseke (CEO)

Yeah. Originations were better than we had predicted. We had kind of backed into a number, and it builds over time. We expect our best quarter to be in the fourth quarter. We still expect fourth quarter originations to be the strongest quarter as we're continuing to build in the SBA division itself. We've only added one BDO so far. The plan is to add two before the end of the year. Yeah, we expect the originations to continue to build.

Chris O'Connell (Director of Equity Research)

Got it. Just given the strong start, is there—do you put a decent probability on the chance that you can eke out fees that end up above the $7-$8 million range in kind of an upside scenario?

Chris Gruseke (CEO)

I think the other side of that probability is there are a lot of changes happening at the SBA right now. There have been a couple of rule changes just since the start of the year. We are looking at that with—we are tempering our expectations on some sort of material outperformance just because there seem to be changes that are undergoing at the SBA, and we are not sure how that is going to affect us in the future. Right now, the changes that have been implemented and announced are not going to hamper our growth in the SBA, but just thinking about what may come as things are changing, evolving rapidly at the SBA.

We'd add to that.

Chris O'Connell (Director of Equity Research)

Helpfull.

Chris Gruseke (CEO)

I should say it's not so much that things are changing rapidly in the SBA; it's that things, in general, are changing with any kind of policy. We're not going to stand here and predict what can happen in Washington for the next six months, given the last four weeks.

Chris O'Connell (Director of Equity Research)

Yeah. Understood. On the expense side, I get the guidance unchanged. I mean, over the course of the year, do you think that the professional fees that have come up over the past couple of quarters, that that eventually shifts into the compensation line or elsewhere within the expense space? Or is that kind of—is this more or less kind of where you guys think you'll be for the next few quarters?

Courtney Sacchetti (CFO)

I do think we did reference on the call, if you heard, that it's related to our initiative. In our professional services line, we've got legal expense, non-deal-related legal expense, consulting costs, recruiting costs. Yes, some of those costs are one-time investments that will shift into the employee expense line, be it through recruiting key talent or implementing new technology that may be software-related or other expense-related items. Yes, we don't anticipate it to continue to remain at an elevated level, but again, there will be potential lumpiness as we explore different initiatives.

Chris O'Connell (Director of Equity Research)

We are reaffirming the $57 million number?

Courtney Sacchetti (CFO)

Yes. Yes.

Chris O'Connell (Director of Equity Research)

Great. Obviously, great job in the credit this quarter with the loan and OREO sales and getting everything off the books and keeping charge-offs super low. Now that you guys have offloaded a good portion of the NPAs that you had on, how do you feel about the remaining two loans that you highlight, making up kind of the majority of the remainder here? Any updates on either of those?

Chris Gruseke (CEO)

No material updates. The retail property that's highlighted there will probably have an update on our next call. That one should undergo some sort of either a re-tenanting or refinance at some point in the next 90 days, so we should have an update then. The office building in New Jersey, we did take a—we wrote down about two-thirds of the loan already. It's in receivership. We're now in control of the cash flows as a bank group, and the litigation against the guarantor is proceeding. No real material update, just marching forward with a little bit more control over the cash flow, which is good for us, and we'll see how things progress in the next couple of quarters.

This is Chris. Chris. In those 88 basis points of MPAs, there is about 17 basis points—correct me if that is not right, Courtney—of fully guaranteed portions of SBA loans.

Courtney Sacchetti (CFO)

Yes. It's 83 of ours is the total, and 17 is guaranteed.

Chris Gruseke (CEO)

Thank you. Eighty-three.

Chris O'Connell (Director of Equity Research)

Perfect. I saw that there's a little bit of movement, I guess, in the risk ratings this quarter. Some things are coming down, a little bit of uptick in special mention. I guess, was it migration between the two, or anything around movement?

Chris Gruseke (CEO)

Yeah. Go ahead. We're cracking up a little bit. I think, Chris, you were asking about the increase in special mention, basically?

Chris O'Connell (Director of Equity Research)

Yeah. Any of the kind of net migration and the risk ratings would be great.

Chris Gruseke (CEO)

Yeah. The risk rating migration primarily happened from Pass credit to special mention. We did put a footnote there. We're confident in these loans. These are primarily healthcare loans that did not hit their pro formas, and they're backed by ultra-high net worth sponsors with plenty of liquidity. They're also performing loans. They're current, and we feel good that they'll return to a past status over the next couple of quarters.

Chris O'Connell (Director of Equity Research)

Got it. Lastly, how are you guys thinking about the share repurchases came in a little better than what I was expecting this quarter? Do you expect to keep kind of plugging along on the plan here through, especially kind of given what the market's done?

Chris Gruseke (CEO)

Yeah. Given where we are, as I've said in the past, it's more an art form than it is a science. Obviously, at these levels, frankly, we'd like to buy back more, right? The fact of the matter is we also need to build consolidated CET1. We will participate as we're able to, but we are seeking to grow consolidated CET1 to 11% or north over a couple of years. We have to balance that at the same time.

Chris O'Connell (Director of Equity Research)

Got it. Thanks, Chris. Okay. Great. That's all I had. Appreciate the time. Thanks for taking my questions.

Chris Gruseke (CEO)

Great. Thanks so much, Chris.

Courtney Sacchetti (CFO)

Thanks, Chris.

Operator (participant)

As a reminder to ask a question, press star one on your telephone keypad. At this time, there are no further audio questions. I'll now hand the call back over to presenters for closing remarks.

Chris O'Connell (Director of Equity Research)

Okay. Thanks so much for participating in the call today. We executed according to what we said we would do in the last couple of quarters. Things look cleaner and more straightforward on the credit side. The two assets we've been talking about have been removed. The SBA business, I'm sorry, is up and running. Margin continues to expand, so we are confident in the path going forward. Thanks for taking the time to listen today.

Operator (participant)

This concludes today's call. Thank you for joining. You may now disconnect your line.